We have seen it the past two days, and as the first-quarter earnings parade wraps up, we are very likely to see it again. Volatility is creeping back into the markets, and the “Sell in May and go away” mantra is starting to quietly be chanted across Wall Street. The problem with going away is there is no place to go. Cash deposits pay nothing, and with inflation and taxes it becomes a negative return instrument.
Stocks remain the place to be, and more conservative companies that pay dividends are probably the best arena for investors to consider. We recently screened the RBC Capital Markets U.S. Equity Top Picks list for companies that not only have solid upside potential, but also pay good dividends. We found four that look good for growth and income accounts.
Marathon Petroleum
This top refiner rolled over after first-quarter earnings and may be offering an outstanding entry point. Marathon Petroleum Corp. (NYSE: MPC) has a diversified business that operates through Refining & Marketing, Speedway, and Pipeline Transportation segments. The company owns and operates seven refineries in the Gulf Coast and Midwest regions of the United States that refine crude oil and other feedstocks, and its distributes refined products through barges, terminals and trucks, as well as purchases ethanol and refined products for resale.
While acknowledging that the company’s margins may have compressed some, many on Wall Street also expect strong revenue contribution from the assets acquired from Hess. Last year the company converted almost all the Hess stations to the company’s Speedway brand.
Marathon reported lousy first-quarter 2016 earnings, owing to weak crack spreads and increased turnaround facility activity. The company posted earnings per share that fell well short of the consensus estimates. Revenues topped estimates, but they were much lower than in the same period a year ago.
Marathon shareholders are paid a 3.53% dividend. The RBC price target for the stock is $58. The Thomson/First Call consensus price target is $52.73, and shares closed trading most recently at $36.22.
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Raytheon
This company has a diversified mix of business, posted solid first-quarter numbers and increased its forward outlook. Raytheon Corp. (NYSE: RTN) is an industry leader in defense, government electronics, space, information technology and technical services.
Raytheon is not only likely to benefit from domestic defense purchasing, but it has posted large contract sales to the Saudis over the past two years. Last year Raytheon purchased privately held cybersecurity company Blackbird Technologies for about $420 million. The acquisition will help expand its surveillance and cybersecurity services. Raytheon provides state-of-the-art electronics, mission systems integration and other capabilities in the areas of sensing; effects; and command, control, communications and intelligence systems, as well as a broad range of mission support services.
Raytheon investors are paid a 2.31% dividend. The RBC price target for the stock is $148, and the consensus target is $141.76. The shares closed the day Wednesday at $126.72.
Dow Chemical
This large cap leader makes sense in all markets and will soon be merging with another sector giant. Dow Chemical Co. (NYSE: DOW) is a market-driven integrated, with an industry-leading portfolio of specialty chemical, advanced materials, agrosciences and plastics businesses. It delivers a broad range of technology-based products and solutions to customers in approximately 180 countries and in high-growth sectors such as packaging, electronics, water, coatings and agriculture. Last year, Dow had annual sales of more than $58 billion and employed approximately 53,000 people worldwide.
With an improving economy domestically, and emerging markets bottoming, the growth potential for a company like Dow Chemical with multiple revenues and product silos is outstanding. The stock is down a stunning 25% since mid-December, and it is offering investors a very timely entry point at current levels.
In December the company announced a huge merger with DuPont. It is planning to combine into a company valued at about $120 billion, which will then split off into three separate companies, one focused on materials, one on agriculture and one on nutrition and electronics specialty products. Many on Wall Street think that the merger offers a very solid investment for the future, and the sum-of-the-parts total may be far greater than the current value of the stock.
Dow Chemical investors receive an outstanding 3.6% dividend. The RBC price target for the stock is $65. The consensus target is $59, and the stock closed Wednesday at $51.39.
PNC Financial Services
This top regional bank was down almost 20% in the first six weeks of 2016 but has rebounded smartly. PNC Financial Services Group Inc. (NYSE: PNC) is one of the country’s largest diversified financial services organizations. It provides retail and business banking; residential mortgage banking; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; and wealth management and asset management. With consistent earnings growth and a very positive and growing loan portfolio, the company is a premiere super-regional bank stock to own.
Wall Street analysts point to numerous positives, including the bank implementing huge cost savings plans. The bank is working on up to $100 million of new savings announced last year, and it is also applauded for outstanding credit/risk management and the limited exposure to the capital markets related areas, while focusing on traditional banking.
Top analysts also cite the bank’s impressive Basel III common equity tier 1 ratio of 10.0% for the fourth quarter of 2015, which well exceeds the 8.5% level that they feel PNC needs to run a conservative but very profitable bank.
PNC shareholders receive a very solid 2.4% dividend. The RBC price target is set at $95, while the consensus target is $94.81. Shares closed Wednesday at $85.37.
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Four top companies in four very separate and diversified sectors. With all eyes now on how the political candidates pivot to the center and the recent dollar weakness, these are the kind of total return leaders that make sense for the balance of 2016 and beyond.
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